Essay Financial Markets and Risk Management – Finance Assignment Help

Assignment Task :

(a) specify clearly the inputs to that calculator, and (b) show any workings that were used to arrive at those inputs. For any instrument other than an option, show your workings.
 

Part A
Suppose the spot exchange rate is |60/$, the US interest rate is 3%, the Indian interest rate is 8%, and the volatility of the rupee-dollar exchange rate is 10%. Suppose also that ABC Ltd has an $100,000 import payment falling due in 3 months.
1. If ABC chooses to lock-in the rupee payment for this import, what will be the rupee outflow that it will have at the due date?

2. If ABC wants a hedge that will cap its rupee outflow at |6.2 million while benefiting from favourable move- ments in the exchange rate, what instrument will you recommend and what will it cost?

3. ABC is unwilling to pay the cost of the above hedge (cap), but is prepared to accept a floor on its rupee outflow. Determine the floor value that ABC must accept for it to obtain the above cap at zero cost. Use trial and error to find the floor value to the nearest |5,000.
 

Part B
Consider any financial risk that your organization was exposed to in 2019 (I have deliberately chosen this period to ensure that I do not have to read anything more about Covid-19).
• Briefly describe the risk
• Explain why you think your organization should or should not have hedged this risk.
• Explain what financial hedges your organization could have used to hedge the risk.